The Alpha Dow vs. The Dow Jones Industrial Average

To most investors, the Dow Jones Industrial Average (Dow) is the market". This renowned index has long been used as a benchmark by many investors as a means to measure overall market performance.

Yet there are two things that the majority of investors are not aware of:

Tracking returns that are adjusted for inflation (real returns) are the true measure of investment success since they tell us how our purchasing power is affected.

The bulk of the long-term gains made by the Dow have occurred in the November through April period.

What is the Alpha Dow? The Alpha Dow is an easy to understand hypothetical index created by Alpha Investment Management to demonstrate the long-term trend of the stock market to "skew" returns into the November through April time period.

We initially created the "Alpha Dow" (without any adjustment for inflation) by doing the following:

Hold the Dow Jones Industrial Average for six months each year from November 1st through April 30th. We refer to this period as the "Dow Power Zone".

Hold the Bloomberg Barclays Intermediate Treasury Index during the other six months each year from May 1st through October 31st. We refer to this period as the "Dow Dead Zone". The Bloomberg Barclays Intermediate Treasury Index measures the performance of intermediate U.S. Treasury securities with remaining maturities of between three and five years.

The first rule of investment is this: Take no unnecessary risks. The fact that the Alpha Dow has outperformed the Dow Jones Industrial Average over the long-term tells us that investors may benefit significantly by avoiding the stock market each year during the "Dow Dead Zone."

In the accompanying charts, the top chart displays the cumulative return for the Alpha Dow (described above) versus the cumulative return for the Dow Jones Industrial Average held continuously for the past 20 years. The bottom chart displays the same indexes after adjusting for inflation. As you can see in the bottom chart, even the relatively low level of inflation that we have experienced in recent decades can still eat away at the actual purchasing power of returns. This illustrates all the more reason why investors should consider employing a simple strategy such as focusing investment in the stock market during the annual "Power Zone" and mostly eschewing the stock market during the annual "Dead Zone".